Technology changes continue to reshape the ways in which we communicate, advertise, shop, entertain and meet new people. Commercial real estate is no exception. One important technological innovation—the internet—has enabled anyone to invest in CRE through crowdfunding.
What is crowdfunding?
Merriam-Webster defines crowdfunding as “the practice of obtaining needed funding by soliciting contributions from a large number of people, especially from the online community.” The most well-known platform is Kickstarter, which has funded everything from camping tools, creative projects, games, to potato salad.
While gathering smaller amounts of money from a pool of investors is not a new idea, doing it in this way has been enabled by the internet. The U.S. JOBS (Jumpstart Our Business Startups) Act also contributed to increased crowdfunding by easing certain advertising and securities registration requirements.
In the past, a real estate developer may have considered syndication to raise money from a personal network of high-wealth individuals, or an investor may have used REITs as an alternative to owning the asset directly. Crowdfunding provides another way for commercial real estate and funding to find each other. Crowdfunding platforms can open up access to a larger pool of potential investors, streamline and standardize the process, fund investments underserved by traditional lending methods, as well vet the proposed investment(s). Some examples of known platforms specifically for real estate investing include RealtyShares, ArborCrowd and Groundfloor.
How do platforms differ?
While almost all platforms promise efficiency and access to more investments or investors, not all platforms cater to the same group. A few key differences in crowdfunding platforms are:
- Minimum levels of investment (as low as $500, but typically in the $10,000 - $25,000 range)
- Who can invest (accredited investor, non-accredited investor or both)
- Debt or equity
- Types of underlying real estate projects (construction, rehab, acquisition of income-producing properties, commercial real estate, single family residential, etc.)
- Individual projects or a portfolio
- Level of due diligence and investigation into the project(s)
Social impact investing
Like other areas of investment, there are options for investors who want to achieve other social or community-oriented goals. Small Change is a crowdfunding platform that seeks financing for socially responsible projects, like the renovation of affordable, energy-efficient apartments in Washington, DC that have historically suffered from high vacancy and vandalism. This platform uses a proprietary index to gauge the project on metrics like green features, building reuse or infill, jobs created, and walkability. A subset of those projects includes “creative economy projects” in underserved communities, such as a food hall in an urban food dessert, or an artist-run bed and breakfast.
Another platform, American Home Owner Preservation uses investors’ funds to purchase distressed mortgage loans to allow more homeowners to avoid foreclosure proceedings and remain in their homes.
Crowdfunding and blockchain
One of the drawbacks of real estate investment generally is illiquidity. When investing in a REIT or trading on an exchange helps with the illiquidity issue, investing through crowdfunding platforms generally will not, as there are no comparable markets to buy and sell the interests purchased. In addition, there may be SEC restrictions limiting the timing of resale. Some platforms may facilitate a transfer between investors on the same platform, but such determinations are made on a case-by-case basis.
Crowdfunding partnered with blockchain technology can help make these investments more liquid. In this scenario, investors own a fractional interest represented by a token that is backed by the underlying real estate asset. Although still in its infancy, the secondary exchange market for such securitized tokens could help increase liquidity in such investments, either through the creation of a centralized token exchange (e.g. Boston Security Token Exchange), or through embedding regulatory compliance in the tokens at the time of issuance, which would allow tokens to be traded across platforms as long as the tokens are in the same compliant, standardized digital form. However, in practice, the small size of the current marketplace still limits the liquidity of the investment. As more investors participate, that is likely to change.
While still a relatively new way to invest in commercial real estate, crowdfunding has been around long enough to experience its first casualties. Realty Shares, a platform founded in 2013, laid off most of its staff in late 2018 after failing to secure additional funding for operating capital. In mid-2019, the platform was purchased by iintoo. As the industry grows, further consolidation and acquisition among platforms may occur.
In theory, crowdfunding opens up investing opportunities on a retail level and removes barriers to entry in terms of the amount of initial capital required and access to personal networks. In practice, however, much of the investment is still only available to high net worth individuals or institutional investors. As the technology continues to develop and more people become comfortable with these platforms, a truer democratization of investment in commercial real estate will hopefully occur.
Article credits: Jen Chan, President and Creator, White Tiger Condo Conversion (CREW San Francisco); and Katherine Pinkard, President, Pinkard Properties, LLC (CREWBaltimore).
Cecilia Hyun is a partner with Siegel Jennings Co., L.P.A., a founding member of the American Property Tax Counsel. Her practice is focused on real estate tax assessment in Ohio. In addition to representing taxpayers before county boards of revision, the Ohio Board of Tax Appeals, and the Ohio Supreme Court, she has written professional articles on real estate taxation issues. She is a past president of CREW Cleveland and has served on the CREW Network Communications and Editorial and Industry Research committees.
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